Health scan
Sydney Morning Herald
Wednesday April 7, 2010
The medical sector has winners and losers. The global financial crisis saw some strong moves into the local healthcare sector, as equity investors sought out defensive areas of the market. The result was that some of the stocks proved to be remarkably resilient, at a time when other sectors were in virtual free fall.However, two events this year indicate that investors must now tread far more carefully than before when looking at healthcare. The financial downturn has thrown into sharp relief the strengths and weaknesses of many companies and, despite a recovering economy, we now seem to be entering a new era of winners and losers.The first event came in mid-February when global blood plasma giant CSL announced that its half-year after-tax profit to December 2009 had jumped 23 per cent from the December 2008 half. After adjusting for an unfavourable foreign exchange rate, the rise was an even more impressive 32 per cent. It was a result that exceeded virtually all market forecasts.But then in March came news that Sigma Pharmaceuticals, which makes drugs for the domestic market, was expecting to report a big loss in its January 2010 financial year. The company cited reduced margins on its generic drugs business and funding issues.Yet despite Sigma's problems, analysts tend to be bullish on the long-term outlook for the sector, pointing especially to an ageing population.But clearly stock selection is crucial, and certainly CSL is one of the stars. In the words biotech and healthcare analyst at Shaw Stockbroking, Matthijs Smith: "CSL absolutely blew the market away with its half-year result. [CEO] Brian McNamee seems to do a superb job with the company and it keeps delivering growth year after year."The other stock that is highly recommended by numerous analysts is bionic ear implant specialist Cochlear.Like CSL it stands out for its powerful global market position, very high profit margins, a strong balance sheet, excellent management and high research and development spending.Also well liked by many analysts, thanks to their strong international exposure, are sleeping disorder specialist ResMed and medical diagnostics company Sonic Healthcare.However, much of the healthcare sector is dependent on government expenditure and, in the current tight fiscal environment, the outlook is not good. Pathology funding is down, hurting several companies, and it is thought that spending on pharmaceuticals could also be cut. The result will be pressure on the already-low margins of companies supplying the domestic drugs market. Hospital operators are also under pressure.E.L. & C. Baillieu senior analyst, Gavin Duffy, who describes himself as "probably the only analyst in Australia who is negative on the healthcare sector" has sell recommendations on medical centre operator Primary Health Care and hospital operators Healthscope and Ramsay Health Care."You can sometimes get more by putting your money into fixed interest at a bank," he says. "And I can see margins being squeezed further."The smaller biotechnology stocks are heavily dependent on a stream of funds to finance their research efforts. Without adequate funding they can collapse."This sector has absolutely been shaken out over the last 12 months," says David Blake, co-editor of the Bioshares weekly biotechnology stock report. "But the companies that have been well structured and are well funded are prospering. They are like a properly designed house, able to withstand a cyclone in north Queensland."He says a key factor for smaller biotechnology companies is the appointment of experienced executives who know how long a particular project will take and its cost. "Get that wrong and everything falls apart," he says.He is particularly positive on Acrux, which in March announced a deal, potentially worth up to $600 million, to license its testosterone treatment Axiron to the US pharmaceuticals giant Eli Lilly. It is believed to be the largest licensing agreement ever concluded by a local biotechnology company."I expect Acrux to return substantial sums of money to investors," Blake says.Shaw Stockbroking's Smith also likes Acrux, noting: "I tend to focus on companies that are well cashed-up, with good management and late-stage products that are either on the market or about to get approval."Smith and Blake both also recommend Pharmaxis, which is developing an impressive stream of new therapies for respiratory diseases.
© 2010 Sydney Morning Herald
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